Long-term reversal in US yields

A multi-decade downward trend in US yields may be about to break, signalling the start of a higher interest environment, according to Peter Lee, Chief Technical Strategist at UBS in New York.

Lee says positive outside years for 2016 on the 10-year (TNX) and 5-year (FVX) US Treasury yields suggest a major structural reversal in rates is likely. Specifically, he says:

The US 10-year Treasury yield (TNX) remains in a 35-year downtrend channel, but a move above last year’s high of 2.5% and a yearly close near the top of its intra-year range have created an outside year pattern. This is the first time this has happened for three decades and Lee expects TNX to retest the top of its long-term downtrend channel at 3.12%. Such a convincing breakout would end the 35-year structural bull and signal the start of a higher rate environment (see Chart 1).

The US 5-year Treasury yield (FVX) ended with a positive outside year via a convincing close above its 2015 intraday high of 1.83%. Lee says this confirms a major yearly reversal pattern and he expects a retest of the top of its downtrend channel at 3.21% in the long-term. In the mean time, a break of the 1.81-1.94% level brings the 2.86-2.99% target into view. The 2013 to 2016 lows at 0.89-1.22% remain as key support. A break of this level would mean a target of 0.54% (see Chart 2).

The US 30-year Treasury yield (TYX) remains in a downtrend channel dating back to 1981. TYX just missed out on forming an outside year pattern in 2016 as it did not trade and close above 3.26% and this suggests TYX may be confined to a trading range between 2.09-2.51% and 3.54-3.74% in 2017 (see Chart 3).